27 October 1999 External T.I. 9919965 - NON-ARM'S LENGTH DISPOSITION, 7(1.1)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Will 7(1.1) apply where shares acquired under a stock option are disposed of to a non-arm's length person?

Position: Yes

Reasons: The provision clearly applies to any disposition of the shares that were subjected to subsection 7(1.1) of the Act.

XXXXXXXXXX 991996
M. P. Sarazin
Attention: XXXXXXXXXX

October 27, 1999

Dear Sirs:

Re: Stock Options from a Canadian-Controlled Private Corporation

This is in reply to your letter dated July 13, 1999, wherein you requested our views relating to the application of subsection 7(1.1) of the Income Tax Act (the "Act") to non-arm's length dispositions of the shares.

Comments

As noted in paragraph 13 of Interpretation Bulletin IT-113R4 titled "Benefits to Employees - Stock Options", by virtue of subsection 7(1.1) of the Act a stock option benefit will not be included in the employee's income until the year in which the employee disposes of or exchanges shares that are subject to subsection 7(1.1) of the Act.

We note that the transfer of shares to the employee's registered retirement savings plan or to a corporation owned by the employee would constitute a disposition by the employee. Consequently, the benefit derived under paragraph 7(1)(a) of the Act will be included in the employee's income in the year that the shares are transferred to the RRSP or corporation. Where the employee owns shares in the corporation at the time of transfer, subsection 7(1.3) of the Act will apply in determining whether subsection 7(1.1) of the Act would apply to any particular disposition of employer shares by the employee. Under subsection 7(1.3) of the Act, an employee is deemed to dispose of shares that are identical properties in the order in which the employee acquired them.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate